The Impact of Oil Revenue Volatility on Production with Emphasis on the Role of Institution: PVAR Approach

The aim of this study is to investigate the probable relationship between oil revenue volatility, economic growth and the role of institutions. To achieve this, the impact of oil revenues, its volatility and role of institutions on economic activity are examined with an emphasis on both economic and political mechanisms. In this regard, the data from 18 oil producing countries during 1996-2012 and Panel Vector Auto Regression models were utilized. The results show a positive impact on the general level of prices and liquidity on production. The effect of the real exchange rate and the economic freedom index on production was negative and positive, respectively. Furthermore, oil revenues have a positive impact on the production in the surveyed countries, while the volatility of these revenues is adversely left. The results indicate that the oil revenues in oilproducing countries are not windfall wealth anymore; and according to the recent growth theories, they can be considered as a production factor. The resource curse is the effect of oil revenue volatility on the economy and the reduction of the institution quality that could have a negative impact on oil production in producing countries.